9M19 core net profit of RM102.2m (+5.1% YoY) came in above our expectation at 86%, but in line with the consensus at 77%, of full-year forecasts. The positive variance from our forecast is due to higher-than-expected volume sales. Due to the better-than-expected results, we upgrade our FY19E/FY20E net profit by 7%/10%. TP is raised from RM1.30 to RM1.50 based on 15.5x FY20E EPS. Upgrade from UNDERPERFORM to MARKET PERFORM.

9M19 core net profit of RM102.2m (+5.1% YoY) came in above our expectation at 86%, but in line with the consensus at 77%, of fullyear forecasts. The positive variance from our forecast is due to higher-than-expected volume sales. A 2nd interim dividend of 1.5 sen was declared this quarter bringing 9M19 DPS to 3.0 sen which is within our expectation.

Key results’ highlights. QoQ, 3Q19 revenue fell 6% which we believe was due to intense competition leading to lower ASPs and volume sales. There was no guidance in terms of actual volume sales and ASPs growth in the results commentary. Correspondingly, 3Q19 PBT fell 9% which we believe was due to margins being crimped (PBT margin fell 0.4ppt from 14.1% in 3Q19 compared to 13.7% in 2Q19) arising from inability to fully pass cost through, as a result of competitive pressure. This led to 3Q19 core net profit of RM34.6m (-9% QoQ) dragged down by a marginally higher effective tax rate of 29.2% compared to 28.7% in 2Q19.

YoY, 9M19 core net profit excluding one-off insurance claims (RM6.5m) came in at RM102.2m (+5.1% YoY) due to stronger revenue (+14.2%) underpinned by the new replacement lines in its Perak plant. Profitability improved on efforts taken to improve efficiency and productivity, including the refurbishment of the older lines and streamlining of work processes.

Outlook. The frantic pace of capacity expansion has resulted in a mild excess supply situation for rubber gloves leading to ASPs compression and flattish or lower profits over the past two quarters. However, we take comfort that this could be nothing more than just a temporary rough patch. However, with the rubber gloves players becoming aware of the intense competition since four months ago; over the last few months, they have implemented any of these measures; (i) slowed new capacity expansion, (ii) more measures to maintain margins, including automation and other cost reduction initiatives, and (iii) intensifying sales efforts to penetrate emerging economies. As such, theoretically, the ASPs pressure problem in the sector should fully sort itself out within another quarter.

Upgrade FY19E/FY20E net profit by 7%/10% to take into account the higher-than-expected volume sales.

Upgrade from UNDERPERFORM to MARKET PERFORM. Following the earnings upgrade and roll-forward valuation from FY19E to FY20E, TP is raised from RM1.30 to RM1.50 based on 15.5x FY20E revised EPS (at +0.5 SD above its historical forward average). The group is trading at a steep discount of 40% compared to the sector’s average due to its weak earnings guidance and it trailing behind peers in terms of capacity expansion and innovation.

Key upside risks to our call are higher-than-expected volume sales and lower-than-expected tax rate.

Source: Kenanga Research - 15 May 2019